Capital Vol. III Part V
Division of Profit into Interest and Profit of Enterprise. Interest-Bearing Capital

Chapter 30. Money-Capital and Real Capital.
I.

The only difficult questions, which we are now approaching in connection
with the credit system, are the following:

First: The accumulation of the actual money-capital. To what extent
is it, and to what extent is it not, an indication of an actual accumulation of
capital, i.e., of reproduction on an extended scale? Is the so-called
plethora of capital — an expression used only with reference to the
interest-bearing capital, i.e., moneyed capital — only a special way
of expressing industrial over-production, or does it constitute a separate
phenomenon alongside of it? Does this plethora, or excessive supply of
money-capital, coincide with the existence of stagnating masses of money
(bullion, gold coin and bank-notes), so that this superabundance of actual money
is the expression and external form of that plethora of loan capital?

Secondly: To what extent does a scarcity of money, i.e., a
shortage of loan capital, express a shortage of real capital (commodity-capital
and productive capital)? To what extent does it coincide, on the other hand,
with a shortage of money as such, a shortage of the medium of circulation?

In so far as we have hitherto considered the peculiar form of accumulation
of money-capital and of money wealth in general, it has resolved itself into an
accumulation of claims of ownership upon labour. The accumulation of the capital
of the national debt has been revealed to mean merely an increase in a class of
state creditors, who have the privilege of a firm claim upon a certain portion
of the tax revenue.[6] By means of these facts, whereby even an accumulation of debts may appear as an accumulation of capital, the height of distortion taking place in the credit system becomes apparent. These promissory notes, which are issued for the originally loaned capital long
since spent, these paper duplicates of consumed capital, serve for their owners
as capital to the extent that they are saleable commodities and may, therefore,
be reconverted into capital.

Titles of ownership to public works, railways, mines, etc., are indeed, as
we have also seen, titles to real capital. But they do not place this capital at
one's disposal. It is not subject to withdrawal. They merely convey legal
claims to a portion of the surplus-value to be produced by it. But these titles
likewise become paper duplicates of the real capital; it is as though a bill of
lading were to acquire a value separate from the cargo, both concomitantly and
simultaneously with it. They come to nominally represent non-existent capital.
For the real capital exists side by side with them and does not change hands as
a result of the transfer of these duplicates from one person to another. They
assume the form of interest-bearing capital, not only because they guarantee a
certain income, but also because, through their sale, their repayment as
capital-values can be obtained. To the extent that the accumulation of this
paper expresses the accumulation of railways, mines, steamships, etc., to that
extent does it express the extension of the actual reproduction process — just
as the extension of, for example, a tax list on movable property indicates the
expansion of this property. But as duplicates which are themselves objects of
transactions as commodities, and thus able to circulate as capital-values, they
are illusory, and their value may fall or rise quite independently of the
movement of value of the real capital for which they are titles. Their value,
that is, their quotation on the Stock Exchange, necessarily has a tendency to
rise with a fall in the rate of interest — in so far as this fall,
independent of the characteristic movements of money-capital, is due merely to
the tendency for the rate of profit to fall; therefore, this imaginary wealth
expands, if for this reason alone, in the course of capitalist production in
accordance with the expressed value for each of its aliquot parts of specific
original nominal value.[7]

Gain and loss through fluctuations in the price of these titles of
ownership, and their centralisation in the hands of railway kings, etc., become,
by their very nature, more and more a matter of gamble, which appears to take
the place of labour as the original method of acquiring capital wealth and also
replaces naked force. This type of imaginary money wealth not only constitutes a
very considerable part of the money wealth of private people, but also of banker’s
capital, as we have already indicated.

In order to quickly settle this question, let us point out that one could
also mean by the accumulation of money-capital the accumulation of wealth in the
hands of bankers (money-lenders by profession), acting as middlemen between
private money-capitalists on the one hand, and the state, communities, and
reproducing borrowers on the other. For the entire vast extension of the credit
system, and all credit in general, is exploited by them as their private
capital. These fellows always possess capital and incomes in money-form or in
direct claims on money. The accumulation of the wealth of this class may take
place completely differently than actual accumulation, but it proves at any rate
that this class pockets a good deal of the real accumulation.

Let us reduce the scope of the problem before us. Government securities,
like stocks and other securities of all kinds, are spheres of investment for
loanable capital — capital intended for bearing interest. They are forms of
loaning such capital. But they themselves are not the loan capital, which is
invested in them. On the other hand, in so far as credit plays a direct role in
the reproduction process, what the industrialist or merchant needs when he
wishes to have a bill discounted or a loan granted is neither stocks nor
government securities. What he needs is money. He, therefore, pledges or sells
those securities if he cannot secure money in any other way. It is the
accumulation of this loan capital with which we have to deal here, and
more particularly accumulation of loanable money-capital. We are not concerned
here with loans of houses, machines, or other fixed capital. Nor are we
concerned with the advances industrialists and merchants make to one another in
commodities and within the compass of the reproduction process; although we must
also investigate this point beforehand in more detail. We are concerned
exclusively with money loans, which are made by bankers, as middlemen, to
industrialists and merchants.

Let us then, to begin with, analyse commercial credit, that is, the credit
which the capitalists engaged in reproduction give to one another. It forms the
basis of the credit system. It is represented by the bill of exchange, a
promissory note with a definite term of payment, i.e., a document of
deferred payment. Everyone gives credit with one hand and receives credit with
the other. Let us completely disregard, for the present, banker’s credit,
which constitutes an entirely different sphere. To the extent that these bills
of exchange circulate among the merchants themselves as means of payment again,
by endorsement from one to another — without, however, the mediation of
discounting — it is merely a transfer of the claim from A to B and does not
change the picture in the least. It merely replaces one person by another. And
even in this case, the liquidation can take place without the intervention of
money. Spinner A, for example, has to pay a bill to cotton broker B, and the
latter to importer C. Now, if C also exports yarn, which happens often enough,
he may buy yarn from A on a bill of exchange and the spinner A may pay the
broker B with the broker’s own bill which was received in payment from C.
At most, a balance will have to be paid in money. The entire transaction then
consists merely in the exchange of cotton and yarn. The exporter represents only
the spinner, and the cotton broker, the cotton planter.

Two things are now to be noted in the circuit of this purely commercial
credit.

First: The settlement of these mutual claims depends upon the return
flow of capital, that is, on C — M, which is merely deferred. If the spinner
has received a bill of exchange from a cotton goods manufacturer, then
manufacturer can pay if the cotton goods which he has on the market have been
sold in the interim. If the corn speculator has a bill of exchange drawn upon
his agent, the agent can pay the money if the corn has been sold in the interim
at the expected price. These payments, therefore, depend on the fluidity of
reproduction, that is, the production and consumption processes. But since the
credits are mutual, the solvency of one depends upon the solvency of another;
for in drawing his bill of exchange, one may have counted either on the return
flow of the capital in his own business or on the return flow of the capital in
a third party’s business whose bill of exchange is due in the meantime.
Aside from the prospect of return flow of capital, payment can only be possible
by means of reserve capital at the disposal of the person drawing the bill of
exchange, in order to meet his obligations in case the return flow of capital
should be delayed.

Secondly: This credit system does not do away with the necessity for
cash payments. For one thing, a large portion of expenses must always be paid in
cash, e.g., wages, taxes, etc. Furthermore, capitalist B, who has
received from C a bill of exchange in place of cash payment, may have to pay a
bill of his own which has fallen due to D before C’s bill becomes due, and
so he must have ready cash. A complete circuit of reproduction as that assumed
above, i.e., from cotton planter to cotton spinner and back again, can
only constitute an exception; it will be constantly interrupted at many points.
We have seen in the discussion of the reproduction process (Vol II, Part III)
that the producers of constant capital exchange, in part, constant capital among
themselves. As a result, the bills of exchange can, more or less, balance each
other out. Similarly, in the ascending line of production, where the cotton
broker draws on the cotton spinner, the spinner on the manufacturer of cotton
goods, the manufacturer on the exporter, the exporter on the importer (perhaps
of cotton again). But the circuit of transactions, and, therefore, the turn
about of the series of claims, does not take place at the same time. For
example, the claim of the spinner on the weaver is not settled by the claim of
the coal-dealer on the machine-builder. The spinner never has any counter-claims
on the machine-builder, in his business, because his product, yarn, never enters
as an element in the machine-builder’s reproduction process. Such claims
must, therefore, be settled by money.

The limits of this commercial credit, considered by themselves, are 1) the
wealth of the industrialists and merchants, that is, their command of reserve
capital in case of delayed returns; 2) these returns themselves. These returns
may be delayed, or the prices of commodities may fall in the meantime or the
commodities may become momentarily unsaleable due to a stagnant market. The
longer the bills of exchange run, the larger must be the reserve capital, and
the greater the possibility of a diminution or delay of the returns through a
fall in prices or a glut on the market. And, furthermore, the returns are so
much less secure, the more the original transaction was conditioned upon
speculation on the rise or fall of commodity-prices. But it is evident that with
the development of the productive power of labour, and thus of production on a
large scale: 1) the markets expand and become more distant from the place of
production; 2) credits must, therefore, be prolonged; 3) the speculative element
must thus more and more dominate the transactions. Production on a large scale
and for distant markets throws the total product into the hands of commerce; but
it is impossible that the capital of a nation should double itself in such a
manner that commerce should itself be able to buy up the entire national product
with its own capital and to sell it again. Credit is, therefore, indispensable
here; credit, whose volume grows with the growing volume of value of production
and whose time duration grows with the increasing distance of the markets. A
mutual interaction takes place here. The development of the production process
extends the credit, and credit leads to an extension of industrial and
commercial operations.

When we examine this credit detached from banker’s credit, it is
evident that it grows with an increasing volume of industrial capital itself.
Loan capital and industrial capital are identical here. The loaned capital is
commodity-capital which is intended either for ultimate individual consumption
or for the replacement of the constant elements of productive capital. What
appears here as loan capital is always capital existing in some definite phase
of the reproduction process, but which by means of purchase and sale passes from
one person to another, while its equivalent is not paid by the buyer until some
later stipulated time. For example, cotton is transferred to the spinner for a
bill of exchange, yarn to the manufacturer of cotton goods for a bill of
exchange, cotton goods to the merchant for a bill, from whose hands they go to
the exporter for a bill, and then, for a bill to some merchant in India, who
sells the goods and buys indigo instead, etc. During this transfer from hand to
hand the transformation of cotton into cotton goods is effected, and the cotton
goods are finally transported to India and exchanged for indigo, which is
shipped to Europe and there enters into the reproduction process again. The
various phases of the reproduction process are promoted here by credit, without
any payment on the part of the spinner for the cotton, the manufacturer of
cotton goods for the yarn, the merchant for the cotton goods, etc. In the first
stages of the process, the commodity, cotton, goes through its various
production phases, and this transition is promoted by credit. But as soon as the
cotton has received in production its ultimate form as a commodity, the same
commodity-capital passes only through the hands of various merchants who promote
its transportation to distant markets, and the last of whom finally sells these
commodities to the consumer and buys other commodities in their stead, which
either become consumed or go into the reproduction process. It is necessary,
then, to differentiate between two stages here:

In the first stage, credit promotes the actual successive phases in the
production of the same article; in the second, credit merely promotes the
transfer of the article, including its transportation, from one merchant to
another, in other words, the process C — M. But here also the commodity is at
least in the process of circulation, that is, in a phase of the reproduction
process.

It follows, then, that it is never idle capital which is loaned here, but
capital which must change its form in the hands of its owner; it exists in a
form that for him is merely commodity-capital, i.e., capital which must
be retransformed, and, to begin with, at least converted into money. It is,
therefore, the metamorphosis of commodities that is here promoted by credit; not
merely C — M, but also M — C and the actual production process. A large
quantity of credit within the reproductive circuit (banker’s credit
excepted) does not signify a large quantity of idle capital, which is being
offered for loan and is seeking profitable investment. It means rather a large
employment of capital in the reproduction process. Credit, then, promotes here
1) as far as the industrial capitalists are concerned, the transition of
industrial capital from one phase into another, the connection of related and
dovetailing spheres of production; 2) as far as the merchants are concerned, the
transportation and transition of commodities from one person to another until
their definite sale for money or their exchange for other commodities.

The maximum of credit is here identical with the fullest employment of
industrial capital, that is, the utmost exertion of its reproductive power
without regard to the limits of consumption. These limits of consumption are
extended by the exertions of the reproduction process itself. On the one hand,
this increases the consumption of revenue on the part of labourers and
capitalists, on the other hand, it is identical with an exertion of productive
consumption.

As long as the reproduction process is continuous and, therefore, the return
flow assured, this credit exists and expands, and its expansion is based upon
the expansion of the reproduction process itself. As soon as a stoppage takes
place, as a result of delayed returns, glutted markets, or fallen prices, a
superabundance of industrial capital becomes available, but in a form in which
it cannot perform its functions. Huge quantities of commodity-capital, but
unsaleable. Huge quantities of fixed capital, but largely idle due to stagnant
reproduction. Credit is contracted 1) because this capital is idle, i.e.,
blocked in one of its phases of reproduction because it cannot complete its
metamorphosis; 2) because confidence in the continuity of the reproduction
process has been shaken; 3) because the demand for this commercial credit
diminishes. The spinner, who curtails his production and has a large quantity of
unsold yarn in stock, does not need to buy any cotton on credit; the merchant
does not need to buy any commodities on credit because he has more than enough
of them.

Hence, if there is a disturbance in this expansion or even in the normal
flow of the reproduction process, credit also becomes scarce; it is more
difficult to obtain commodities on credit. However, the demand for cash payment
and the caution observed toward sales on credit are particularly characteristic
of the phase of the industrial cycle following a crash. During the crisis
itself, since everyone has products to sell, cannot sell them, and yet must sell
them in order to meet payments, it is not the mass of idle and
investment-seeking capital, but rather the mass of capital impeded in its
reproduction process, that is greatest just when the shortage of credit is most
acute (and therefore the rate of discount highest for banker’s credit). The
capital already invested is then, indeed, idle in large quantities because the
reproduction process is stagnant. Factories are closed, raw materials
accumulate, finished products flood the market as commodities. Nothing is more
erroneous, therefore, than to blame a scarcity of productive capital for such a
condition. It is precisely at such times that there is a superabundance of
productive capital, partly in relation to the normal, but temporarily reduced
scale of reproduction, and partly in relation to the paralysed consumption.

Let us suppose that the whole of society is composed only of industrial
capitalists and wage-workers. Let us furthermore disregard price fluctuations,
which prevent large portions of the total capital from replacing themselves in
their average proportions and which, owing to the general interrelations of the
entire reproduction process as developed in particular by credit, must always
call forth general stoppages of a transient nature. Let us also disregard the
sham transactions and speculations, which the credit system favours. Then, a
crisis could only be explained as the result of a disproportion of production in
various branches of the economy, and as a result of a disproportion between the
consumption of the capitalists and their accumulation. But as matters stand, the
replacement of the capital invested in production depends largely upon the
consuming power of the non-producing classes; while the consuming power of the
workers is limited partly by the laws of wages, partly by the fact that they are
used only as long as they can be profitably employed by the capitalist class.
The ultimate reason for all real crises always remains the poverty and
restricted consumption of the masses as opposed to the drive of capitalist
production to develop the productive forces as though only the absolute
consuming power of society constituted their limit.

A real lack of productive capital, at least among capitalistically developed
nations, can be said to exist only in times of general crop failures, either in
the principal foodstuffs or in the principal industrial raw materials.

However, in addition to this commercial credit we have actual money credit.
The advances of the industrialists and merchants among one another are
amalgamated with the money advances made to them by the bankers and
money-lenders. In discounting bills of exchange the advance is only nominal. A
manufacturer sells his product for a bill of exchange and gets this bill
discounted by some bill-broker. In reality, the latter advances only the credit
of his banker, who in turn advances to the broker the money-capital of his
depositors. The depositors consist of the industrial capitalists and merchants
themselves and also of workers (through savings-banks) — as well as
ground-rent recipients and other unproductive classes. In this way every
individual industrial manufacturer and merchant gets around the necessity of
keeping a large reserve fund and being dependent upon his actual returns. On the
other hand, the whole process becomes so complicated, partly by simply
manipulating bills of exchange, partly by commodity transactions for the sole
purpose of manufacturing bills of exchange, that the semblance of a very solvent
business with a smooth flow of returns can easily persist even long after
returns actually come in only at the expense partly of swindled money-lenders
and partly of swindled producers. Thus business always appears almost
excessively sound right on the eve of a crash. The best proof of this is
furnished, for instance, by the Reports on Bank Acts of 1857 and 1858, in which
all bank directors, merchants, in short all the invited experts with Lord
Overstone at their head, congratulated one another on the prosperity and
soundness of business — just one month before the outbreak of the crisis in August
1857. And, strangely enough, Tooke in his History of Prices succumbs to
this illusion once again as historian for each crisis. Business is always
thoroughly sound and the campaign in full swing, until suddenly the debacle
takes place.

We revert now to the accumulation of money-capital.

Not every augmentation of loanable money-capital indicates a real
accumulation of capital or expansion of the reproduction process. This becomes
most evident in the phase of the industrial cycle immediately following a
crisis, when loan capital lies around idle in great quantities. At such times,
when the production process is curtailed (production in the English industrial
districts was reduced by one-third after the crisis of 1847), when the prices of
commodities are at their lowest level, when the spirit of enterprise is
paralysed, the rate of interest is low, which in this case indicates nothing
more than an increase in loanable capital precisely as a result of contraction
and paralysation of industrial capital. It is quite obvious that a smaller
quantity of a circulation medium is required when the prices of commodities have
fallen, the number of transactions decreased, and the capital laid out for wages
reduced; that, on the other hand, no additional money is required to function as
world-money after foreign debts have been liquidated either by the export of
gold or as a result of bankruptcies; that, finally, the volume of business
connected with discounting bills of exchange diminishes in proportion with the
reduced number and magnitudes of the bills of exchange them-selves. Hence the
demand for loanable money-capital, either to act as a medium of circulation or
as a means of payment (the investment of new capital is still out of the
question), decreases and this capital, therefore, becomes relatively abundant.
Under such circumstances, however, the supply of loanable money-capital also
increases, as we shall later see.

Thus, the situation after the crisis of 1847 was characterised by "a
limitation of transaction and a great superabundance of money." (Commercial
Distress, 1847-48, Evidence No. 1664.) The rate of interest was very low because
of the "almost perfect destruction of commerce and the almost total want of
means of employing money" (loc. cit., p. 45, testimony of Hodgson,
Director of the Royal Bank of Liverpool). What nonsense these gentlemen
concocted (and Hodgson is, moreover, one of the best of them) in order to
explain these facts, can be seen from the following remark:

"The pressure" (1847) "arose from the real diminution of the moneyed capital of the country, caused partly by the necessity of paying in gold for imports from all parts of the world, and partly by the absorption of floating into fixed capital." [1. c., p. 39.]

How the conversion of floating capital into fixed capital
reduces the money-capital of a country is unintelligible. For, in the case of
railways, e.g., in which capital was mainly invested at that time,
neither gold nor paper is used for viaducts and rails, and the money for the
railway stocks, to the extent that it had been deposited solely in payment,
performed exactly the same functions as any other money deposited in banks and
even increased the loanable money-capital temporarily, as already shown above;
but to the extent that it had actually been spent for construction, it
circulated in the country as a medium of purchase and of payment. Only in so far
as fixed capital cannot be exported, so that with the impossibility of its
export the available capital secured from returns for exported articles also
drops out of the picture — including the returns in cash or bullion — only to that extent could the money-capital be affected. But at that time English export
articles were also piled up in huge quantities on the foreign markets without
being able to be sold. It is true, the floating capital of the merchants and
manufacturers of Manchester, etc., who had a portion of their normal business
capital tied up in railway stocks and were therefore dependent upon borrowed
capital for running their business, had become fixed, and they, therefore, had
to suffer the consequences. But it would have been the same, if the capital
belonging to their business, but withdrawn from it, had been invested, say, in
mines instead of railways-mining products like iron, coal, copper being
themselves in turn floating capital. The actual reduction of available
money-capital through crop failures, corn imports, and gold exports constituted,
naturally, an event that had nothing to do with the railway swindle.

"Almost all mercantile houses had begun to starve their business more or less ... by taking part of their commercial capital for railways." — "Loans to so great an extent by commercial houses to railways [loc. cit., p. 42] induced them to lean too much upon... banks by the discount of paper, whereby to carry on their commercial operations" (the same Hodgson, loc. cit., p. 67). "In Manchester there have been immense losses in consequence of the speculation in railways" (R. Gardner, previously cited in Vol. I, Ch.
XIII, 3, c, and in several other places; Evidence No. 4884, loc. cit.).

One of the principal causes of the crisis of 1847 was the colossal flooding
of the market and the fabulous swindle in the East Indian trade with
commodities. But there were also other circumstances which bankrupted very rich
firms in this line:

"They had large means, but not available. The whole of
their capital was locked up in estates in the Mauritius, or indigo factories, or
sugar factories. Having incurred liabilities to the extent of £500,000-600,000,
they had no available assets to pay their bills, and eventually it proved that
to pay their bills they were entirely dependent upon their credit." (Ch.
Turner, big East Indian merchant in Liverpool, No. 730, loc. cit.)

See also Gardner (No. 4872, loc. cit.):

"Immediately after the China
treaty, so great a prospect was held out to the country of a great extension of
our commerce with China, that there were many large mills built with a view to
that trade exclusively, in order to manufacture that class of cloth which is
principally taken for the China market, and our previous manufactures had the
addition of all those." — "4874. How has that trade turned out? — Most ruinous, almost beyond description; I do not believe, that of the whole of the shipments that were made in 1844 and 1845 to China, above two-thirds of the
amount have ever been returned; in consequence of tea being the principal
article of repayment and of the expectation that was held out, we, as
manufacturers, fully calculated upon a great reduction in the duty on tea."

And now, naively expressed, comes the characteristic credo of the English
manufacturer:

"Our commerce with no foreign market is limited by their
power to purchase the commodity, but it is limited in this country by our
capability of consuming that which we receive in return for our manufactures."

(The relatively poor countries, with whom England trades, are, of course, able
to pay for and consume any amount of English products, but unfortunately wealthy
England cannot assimilate the products sent in return.)

"4876. I sent out
some goods in the first instance, and the goods sold at about 45 per cent loss,
from the full conviction that the price, at which my agents could purchase tea,
would leave so great a profit in this country as to make up the deficiency...
but instead of profit, I lost in some instances 25 and up to 50 per cent." — "4877. Did the manufacturers generally export on their own account? — Principally; the merchants, I think, very soon saw that the thing would not answer, and they rather encouraged the manufacturers to consign than take a direct interest
themselves."

In 1857, on the other hand, the losses and failures fell
mainly upon the merchants, since the manufacturers left them the task of
flooding the foreign markets "on their own account."

An expansion of money-capital, which arises out of the fact that, in view of
the expansion of banking (see, below, the example of Ipswich, where in the
course of a few years immediately preceding 1857 the deposits of the capitalist
farmers quadrupled), what was formerly a private hoard or coin reserve is always
converted into loanable capital for a definite time, does not indicate a growth
in productive capital any more than the increasing deposits with the London
stock banks when the latter began to pay interest on deposits. As long as the
scale of production remains the same, this expansion leads only to an abundance
of loanable money-capital as compared with the productive. Hence the low rate of
interest.

After the reproduction process has again reached that state of prosperity
which precedes that of over-exertion, commercial credit becomes very much
extended; this forms, indeed, the "sound" basis again for a ready flow
of returns and extended production. In this state the rate of interest is still
low, although it rises above its minimum. This is, in fact, the only time
that it can be said a low rate of interest, and consequently a relative
abundance of loanable capital, coincides with a real expansion of industrial
capital. The ready flow and regularity of the returns, linked with extensive
commercial credit, ensures the supply of loan capital in spite of the increased
demand for it, and prevents the level of the rate of interest from rising. On
the other hand, those cavaliers who work without any reserve capital or without
any capital at all and who thus operate completely on a money credit basis begin
to appear for the first time in considerable numbers. To this is now added the
great expansion of fixed capital in all forms, and the opening of new
enterprises on a vast and far-reaching scale. The interest now rises to its
average level. It reaches its maximum again as soon as the new crisis sets in.
Credit suddenly stops then, payments are suspended, the reproduction process is
paralysed, and with the previously mentioned exceptions, a superabundance of
idle industrial capital appears side by side with an almost absolute absence of
loan capital.

On the whole, then, the movement of loan capital, as expressed in the rate
of interest, is in the opposite direction to that of industrial capital. The
phase wherein a low rate of interest, but above the minimum, coincides with the
"improvement" and growing confidence after a crisis, and particularly
the phase wherein the rate of interest reaches its average level, exactly midway
between its minimum and maximum, are the only two periods during which an
abundance of loan capital is available simultaneously with a great expansion of
industrial capital. But at the beginning of the industrial cycle, a low rate of
interest coincides with a contraction, and at the end of the industrial cycle, a
high rate of interest coincides with a superabundance of industrial capital. The
low rate of interest that accompanies the "improvement" shows that the
commercial credit requires bank credit only to a slight extent because it is
still self-supporting.

The industrial cycle is of such a nature that the same circuit must
periodically reproduce itself, once the first impulse has been given.[8]
During a period of slack, production sinks below the level, which it had attained in the preceding cycle and for which the technical basis has now been laid. During prosperity — the middle period — it
continues to develop on this basis. In the period of over-production and
swindle, it strains the productive forces to the utmost, until it exceeds the
capitalistic limits of the production process.

It is clear that there is a shortage of means of payment during a period of
crisis. The convertibility of bills of exchange replaces the metamorphosis of
commodities themselves, and so much more so exactly at such times the more a
portion of the firms operates on pure credit. Ignorant and mistaken bank
legislation, such as that of 1844-45, can intensify this money crisis. But no
kind of bank legislation can eliminate a crisis.

In a system of production, where the entire continuity of the reproduction
process rests upon credit, a crisis must obviously occur — a tremendous rush for
means of payment — when credit suddenly ceases and only cash payments have
validity. At first glance, therefore, the whole crisis seems to be merely a
credit and money crisis. And in fact it is only a question of the convertibility
of bills of exchange into money. But the majority of these bills represent
actual sales and purchases, whose extension far beyond the needs of society is,
after all, the basis of the whole crisis. At the same time, an enormous quantity
of these bills of exchange represents plain swindle, which now reaches the light
of day and collapses; furthermore, unsuccessful speculation with the capital of
other people; finally, commodity-capital which has depreciated or is completely
unsaleable, or returns that can never more be realised again. The entire
artificial system of forced expansion of the reproduction process cannot, of
course, be remedied by having some bank, like the Bank of England, give to all
the swindlers the deficient capital by means of its paper and having it buy up
all the depreciated commodities at their old nominal values. Incidentally,
everything here appears distorted, since in this paper world, the real price and
its real basis appear nowhere, but only bullion, metal coin, notes, bills of
exchange, securities. Particularly in centres where the entire money business of
the country is concentrated, like London, does this distortion become apparent;
the entire process becomes incomprehensible; it is less so in centres of
production.

Incidentally in connection with the superabundance of industrial capital
which appears during crises the following should be noted: commodity-capital is
in itself simultaneously money-capital, that is, a definite amount of value
expressed in the price of the commodities. As use-value it is a definite quantum
of objects of utility, and there is a surplus of these available in times of
crises. But as money-capital as such, as potential money-capital, it is subject
to continual expansion and contraction. On the eve of a crisis, and during it,
commodity-capital in its capacity as potential money-capital is contracted. It
represents less money-capital for its owner and his creditors (as well as
security for bills of exchange and loans) than it did at the time when it was
bought and when the discounts and mortgages based on it were transacted. If this
is the meaning of the contention that the money-capital of a country is reduced
in times of stringency, this is identical with saying that the prices of
commodities have fallen. Such a collapse in prices merely balances out their
earlier inflation.

The incomes of the unproductive classes and of those who live on fixed
incomes remain in the main stationary during the inflation of prices which goes
hand in hand with over-production and over-speculation. Hence their consuming
capacity diminishes relatively, and with it their ability to replace that
portion of the total reproduction which would normally enter into their
consumption. Even when their demand remains nominally the same, it decreases in
reality.

It should be noted in regard to imports and exports, that, one after
another, all countries become involved in a crisis and that it then becomes
evident that all of them, with few exceptions, have exported and imported too
much, so that they all have an unfavourable balance of payments. The
trouble, therefore, does not actually lie with the balance of payments. For
example, England suffers from a drain of gold. It has imported too much. But at
the same time all other countries are over-supplied with English goods. They
have thus also imported too much, or have been made to import too much. (There
is, indeed, a difference between a country which exports on credit and those
which export little or nothing on credit. But the latter then import on credit;
and this is only then not the case when commodities are sent to them on
consignment.) The crisis may first break out in England, the country which
advances most of the credit and takes the least, because the balance of
payments, the balance of payments due, which must be settled immediately, is
unfavourable, even though the general balance of trade is favourable. This is explained partly as a result of the credit which it has granted, and partly as a result of the huge quantity of capital loaned to foreign countries,
so that a large quantity of returns flow back to it in commodities, in addition
to the actual trade returns. (However, the crisis has at times first broken out
in America, which takes most of the commercial and capital credit from England.)
The crash in England, initiated and accompanied by a gold drain, settles England’s balance of payments, partly by a bankruptcy of its importers (about which more below), partly by disposing of a portion of its commodity-capital at low prices abroad, and partly by the sale of foreign securities, the purchase of English
securities, etc. Now comes the turn of some other country. The balance of
payments was momentarily in its favour; but now the time lapse normally existing
between the balance of payments and balance of trade has been eliminated or at
least reduced by the crisis: all payments are now suddenly supposed to be made
at once. The same thing is now repeated here. England now has a return flow of
gold, the other country a gold drain. What appears in one country as excessive
imports, appears in the other as excessive exports, and vice versa. But
over-imports and over-exports have taken place in all countries (we are not
speaking here about crop failures, etc., but about a general crisis); that is
over-production promoted by credit and the general inflation of prices that goes
with it.

In 1857, the crisis broke out in the United States. A flow of gold from
England to America followed. But as soon as the bubble in America burst, the
crisis broke out in England and the gold flowed from America to England. The
same took place between England and the continent. The balance of payments is in
times of general crisis unfavourable to every nation, at least to every
commercially developed nation, but always to each country in succession, as in
volley firing, i.e., as soon as each one’s turn comes for making
payments; and once the crisis has broken out, e.g., in England, it
compresses the series of these terms into a very short period. It then
becomes evident that all these nations have simultaneously over-exported (thus
over-produced) and over-imported (thus over-traded), that prices were inflated
in all of them, and credit stretched too far. And the same break-down takes
place in all of them. The phenomenon of a gold drain then takes place
successively in all of them and proves precisely by its general character 1)
that gold drain is just a phenomenon of a crisis, not its cause; 2) that the
sequence in which it hits the various countries indicates only when their
judgement-day has come, i.e., when the crisis started and its latent
elements come to the fore there.

It is characteristic of the English economic writers — and the economic
literature worth mentioning since 1830 resolves itself mainly into a literature
on currency, credit, and crises — that they look upon the export of precious
metals in times of crisis, in spite of the turn in the rates of exchange, only
from the standpoint of England, as a purely national phenomenon, and resolutely
close their eyes to the fact that all other European banks raise their rate of
interest when their bank raises its own in times of crisis, and that, when the
cry of distress over the drain of gold is raised in their country today, it is
taken up in America tomorrow and in Germany and France the day after.

In 1847, "the engagements running upon this country had to be met" [mostly for corn]. "Unfortunately, they were met to a great extent by
failures" [wealthy England secured relief by bankruptcies in its
obligations toward the continent and America], "but to the extent to which
they were not met by failures, they were met by the exportation of bullion."
(Report of Committee on Bank Acts, 1857.)

In other words, in so far as a crisis in England is intensified by bank legislation, this legislation is a means of cheating the corn-exporting countries in periods of famine, first on their corn and then on the money for the corn. A prohibition on the export of corn during such periods for countries which are themselves labouring more or less under
scarcities, is, therefore, a very rational measure to thwart this plan of the
Bank of England to "meet obligations" for corn imports "by
bankruptcies." It is after all much better that the corn producers and
speculators lose a portion of their profit for the good of their own country
than their capital for the good of England.

It follows from the above that commodity-capital, during crises and during
periods of business depression in general, loses to a large extent its capacity
to represent potential money-capital. The same is true of fictitious capital,
interest-bearing paper, in so far as it circulates on the stock exchange as
money-capital. Its price falls with rising interest. It falls, furthermore, as a
result of the general shortage of credit, which compels its owners to dump it in
large quantities on the market in order to secure money. It falls, finally, in
the case of stocks, partly as a result of the decrease in revenues for which it
constitutes drafts and partly as a result of the spurious character of the
enterprises which it often enough represents. This fictitious money-capital is
enormously reduced in times of crisis, and with it the ability of its owners to
borrow money on it on the market. However, the reduction of the money
equivalents of these securities on the stock exchange list has nothing to do
with the actual capital which they represent, but very much indeed with the
solvency of their owners.

Notes

6. The public fund is nothing but imaginary capital, which represents that portion of the annual revenue, which is set aside to pay the debt. An equivalent amount of capital has been spent; it is this
which serves as a denominator for the loan, but it is not this which is
represented by the public fund; for the capital no longer exists. New wealth
must be created by the work of industry; a portion of this wealth is annually
set aside in advance for those who have loaned that wealth which has been spent;
this portion is taken by means of taxes from those who produce it, and is given
to the creditors of the state, and, according to the customary proportion
between capital and interest in the country, an imaginary capital is assumed
equivalent to that which could give rise to the annual income which these
creditors are to receive. (Sismondi, Nouveaux principes [Seconde édition, Paris, 1827], II, p. 230.)

7. A portion of the accumulated loanable money-capital is indeed merely an expression of industrial capital. For instance, when England, in 1857, had invested 180 million in American railways
and other enterprises, this investment was transacted almost completely by the
export of English commodities for which the Americans did not have to make
payment in return. The English exporter drew bills of exchange for these
commodities on America, which the English stock subscribers bought up and which
were sent to America for purchasing the stock subscriptions.

8. [As I have already stated elsewhere [English edition: Vol. I. — Ed.], a change has taken place here since the last major general crisis. The acute form of the periodic process with its
former ten-year cycle, appears to have given way to a more chronic, long drawn
out, alternation between a relatively short and slight business improvement and
a relatively long, indecisive depression-taking place in the various industrial
countries at different times. But perhaps it is only a matter of a prolongation
of the duration of the cycle. In the early years of world commerce, 1845-47, it
can be shown that these cycles lasted about five years; from 1847 to 1867 the
cycle is clearly ten years; is it possible that we are now in the preparatory
stage of a new world crash of unparalleled vehemence? Many things seem to point
in this direction. Since the last general crisis of 1867 many profound changes
have taken place. The colossal expansion of the means of transportation and
communication — ocean liners, railways, electrical telegraphy, the Suez Canal — has made a real world-market a fact. The former monopoly of England in industry has been challenged by a number of competing industrial countries; infinitely
greater and varied fields have been opened in all parts of the world for the
investment of surplus European capital, so that it is far more widely
distributed and local over-speculation may be more easily overcome. By means of
all this, most of the old breeding-grounds of crises and opportunities for their
development have been eliminated or strongly reduced. At the same time,
competition in the domestic market recedes before the cartels and trusts, while
in the foreign market it is restricted by protective tariffs, with which all
major industrial countries, England excepted, surround themselves. But these
protective tariffs are nothing but preparations for the ultimate general
industrial war, which shall decide who has supremacy on the world-market. Thus
every factor, which works against a repetition of the old crises, carries within
itself the germ of a far more powerful future crisis. — F. E.]